Montag, 22. Juni 2009

Germany's "Schuldenbremse"

Earlier this year, the German parliament decided to put something called the "Schuldenbremse" into the German constitution. What it means is that both the federal government and the states will no longer be allowed to run deficits from 2016 (federal government) and 2020 (states) onwards. Certain exceptions apply.

Wolfgang Münchau comments on this in today's FT. In his opinion, Germans have a "bizarre" level of debt-aversion, and consider debt to be "morally objectionable". As for the Schuldenbremse, he thinks it will either turn Germany into a "structural basket case and ... drag down the rest of Europe for a generation" or "the tensions inside the eurozone are going to become unbearable". Why? Well, he basically seems to think that Germany needs to run significant budget deficits more or less forever. Otherwise, lack of demand and high personal savings rates will keep Germany in a perennial recession.

I'm not sure I agree.

Well, I actually do agree that it's very unlikely that Germany can run a balanced budget. Assuming nominal GDP keeps growing, a balanced budget would mean that government debt is continuously declining in % of GDP. If Germans keep saving the way they've done in the past, and if Germany can't continue to run a massive trade surplus like it did in the past, at least a moderate budget deficit will probably be required to keep the economy going.

But I don't quite understand Münchau's fear of "locking the door and throwing away the keys": Basically, he's afraid that this rule will have to be followed slavishly, because it can only be changed with a 2/3 majority.

Maybe he should relax:

- Apart from 0.35 % of GDP federal deficit that remains allowed, it is also explicitly permitted to run a larger deficit if the economy is weak. If there really is a structural lack of underlying demand in the German economy, it will always stay weak unless the government runs a deficit.

- But more importanty, in case of "natural catastrophes or exceptional emergencies", the rule does not apply at all. All that is needed is a simple majority in parliament. The current financial crisis is explicitly seen as an "exceptional emergency".

On top of this, I foresee something else:

What's the problem if you are not allowed to run deficits on budget? Simply create off-budget vehicles! If banks can set up tons of SPVs, why can't the government? Instead of giving taxpayer money to the pension system, let the pension system take out government-guaranteed loans. Instead of financing roads directly from the budget, set up an infrastructure fund which takes out loans, repayable from future tax allocations. Let universities borrow from banks to renovate their buildings, again with long-term government guaranteed repayment. Politicians will find ways...


  1. You hit the nail with the off-balance vehicles. The Schuldenbremse ("debt break") ist basically ineffective.

    More more reason why I tend not to agree with Munchau: The Schuldenbremse limits governmental debt only. Why does he think, that the overall debt level is shrinking just because the government stops borrowing? The private can step in.

  2. One more thing: I expect falling nominal GDP for Germany since the population shrinks. However, the GDP per person should increase.

  3. If we get back to trend inflation of 1-2 % p.a., that should be enough to keep nominal GDP growing at least a bit.

  4. O yes. That was written hastily: "I expect falling real GDP". So you are right, inflation will of course lead in combination with the Schuldenbremse to falling debt over nominal GDP as Schuldenbremse is in nominal terms.